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MAY 7, 2003
By Brian Hindo For AOL, Ads Are Still a Minus [Page 2 of 2] SOGGY RAINMAN. Another common agency complaint concerns AOL's online technology. Many screens on the service -- including many in the highest-traffic areas -- exist on a 10-year-old, proprietary publishing platform called Rainman, which imposes far more restrictions in terms of size and functionality than screens using the standard HTML Web format. Rainman has it virtues: It ensures that pages load fast, which is crucial to keeping the audience connected. But the technology also limits the size of many ads or requires them to be created in nonstandard sizes, causing some advertisers who covet flexibility to stay away. In the late '90s, AOL tried to deal with this problem by converting parts of the service to the Web-standard format used by other AOL Time Warner sites, including Netscape and CompuServe. But after slower page loads squeezed traffic, AOL switched back to Rainman. Otremba says America Online has redesigned many of its Rainman screens to display some of the standard ad sizes endorsed by the Interactive Advertising Bureau industry group -- and that AOL is working to speed up screen times for features such as video. "TOO LARGE TO IGNORE." Of course, most advertisers ultimately are more interested in results than in having their calls returned promptly. And AOL's paying audience of more than 25 million remains a huge lure. "We buy on AOL and will continue to buy," says Brian McAndrews, president and CEO of aQuantive, which owns online agency Avenue A in Seattle. "They're too large to ignore." That's one of the reasons Mark May, an analyst at Kaufman Brothers in New York, is optimistic about America Online's prospects. He recalls a similar pattern at Yahoo, which also experienced an ad-revenue decline after its long-term deals dried up in 2001. The difference with AOL, says May, lies in the length of its contracts. Yahoo's average term was one year, vs. two to three years for AOL. "It's a lag effect," says May. "It has taken longer for that to catch up to AOL." May reaffirmed his buy rating on AOL Time Warner shares after the media powerhouse beat earnings estimates for the first quarter, thanks to better-than-expected results from its cable-TV and film-entertainment units. But May is also optimistic about America Online's chances to get its own ad sales growing again, as the sector strengthens -- even though as much as one-third of AOL's ad revenue comes from paid listings on its Web search engine, which is provided by Google. CUSTOMER DRAIN. Moreover, May expects the parent company's financial performance to improve markedly in 2003. He sees total revenues climbing about 5%, to $42.8 billion, while earnings before interest, taxes, depreciation, and amortization (EBITDA) rise about 9%, to $9.5 billion. At the same time, he expects AOL Time Warner to cut its total debt by roughly 8%, to $26.2 billion, thanks mainly to the sale of assets such as the Comedy Central cable-TV network, which the company just unloaded on Viacom for $1.23 billion. Thus, May pegs AOL Time Warner's stock at $17 by yearend. America Online's recovery won't be a slam dunk, obviously. And it may not occur at all unless the Internet unit does a better job of maintaining its subscriber base. AOL's dialup service lost approximately 540,000 customers in the first quarter, though some of them migrated to AOL's more expensive broadband service. Taking that into account, AOL's net subscriber losses for the first quarter still totaled a steep 289,000, leaving analysts wary of continued leakage, though May says America Online can partly offset that by cutting costs. That puts tremendous pressure on America Online to sign up customers for premium offerings such as its MusicNet digital-tunes service and broadband Net access, for which it charges $45 a month. MAKING NICE. Otremba notes that America Online now has just under 1 million broadband subscribers -- having added 250,000 in the first quarter alone. He also says numbers have remained steady in high-traffic areas of the site, such as the Welcome Screen and the Autos channel. Moreover, AOL announced on May 5 that Sherman's deputy, Lisa Brown, will serve as his permanent replacement. AOL promises that she'll continue his efforts to make the ad sales group more "regionally focused" and "customer-friendly." Still, having to apologize both for past arrogance and for a dwindling audience is a tough task for any seller in what's still a buyer's market.
 With Jane Black in New York Hindo covers the financial markets for BusinessWeek Online Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
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